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Shares of United Technologies (UTX) fell roughly 0.5% on Friday after issuing its full year outlook for 2013. The aerospace and building system company known from its Otis, Pratt & Whitney and Sikorsky divisions failed to impress investors and analysts with its update for the coming year.

Confirmed 2012 Outlook...

United Technologies narrowed its full year forecast for 2012. Earnings per share are expected to come in around $5.32 per share, consistent with an earlier guidance of $5.25 to $5.35 per share. Sales are expected to come in around $58 billion.

CEO and Chairman Chenevert commented on the past year, "2012 has been a transformational year for United Technologies. We leveraged our organizational structure to optimize our global scale, completed the acquisition of Goodrich and acquired control of the International Aero Engines joint venture, and reshaped our portfolio to focus on our core markets of aerospace and building systems."

... But 2013 Guidance Is Disappointing

United Technologies issued a slightly disappointing outlook for the full year of 2013. For the coming year the company expects earnings per share to increase between 10 and 16%, coming in between $5.85 and $6.15 per share.

Sales growth is expected to come in between 10 and 12%, suggesting that revenues could come in between $64 and $65 billion. Growth is driven as a result of the acquisition of Goodrich, but sales continue to grow by 3 to 5% on an organic basis.

Analysts expected that United Technologies would guide for earnings of $6.12 per share on revenues of $66.4 billion.

Chenevert commented on the outlook, "In 2013, UTC's reshaped portfolio will be well positioned for accelerated top line growth. We anticipate organic sales growth at each of our five businesses, even with continued softness in Europe and a decline in US defense spending. We expect sales growth, our relentless focus on cost reduction and productivity, and the incremental benefits from our portfolio transformation to drive 10 to 16 percent earnings per share growth in 2013, despite significant pension headwinds."

Valuation

United Technologies ended its third quarter with $6.2 billion in cash, equivalents and short term investments. The company operates with a sizable short and long term debt position of $28.7 billion, leaving the company with a net debt position of $22.5 billion.

For the full year of 2012, the company expects to generate sales of $58 billion. Annual earnings are expected to come in around $4.8 billion, or $5.32 per diluted share.

The market values United Technologies at $73.3 billion at the moment. This values the firm at 1.3 times 2012s annual revenues and 15-16 times annual earnings.

The company currently pays a quarterly dividend of $0.54 per share, for an annual dividend yield of 2.7%.

Transformation Year

2012 was a transformation year for the firm. Shares trade with modest gains of 10%, trading in a narrow price range of $70-$85 for most of the year. At the moment shares are exchanging hands at $80, trading within sight of all time highs set around $90 last year.

The company quite dramatically transformed the business this year, by focusing on the aerospace and building systems market. In the summer, the company bought aerospace firm Goodrich Corporation in a $18.4 billion deal. The profit contribution of $0.70 per share in 2013 is slightly disappointing.

Later in the year the company sold Milton Roy, Sullair and Sundyne Corporation, all three industrial businesses for $3.46 billion to BC partners and the Carlyle Group (CG).

Chenevert commented on the transition, "With the portfolio transformation substantially complete, our team is focused on integration and execution. This focus will allow us to deliver consistent earnings growth and strong cash flow well into the future."

Investment Thesis

United Technologies is facing headwinds from a range of directions. The Sikorsky helicopter contract with the Canadian government is loss-making and will impact earnings by some 21 cents in 2013. Lower pension discount rates increase the firm's pension obligations thereby reducing earnings by another 25 cents.

With the aerospace division making up half of total revenues the fiscal cliff outcome could drastically impact United's business. However the firm announces that the guidance will hold even if no agreement is reached. Irrelevant of the outcome, United expects that defense sales will fall by mid-single digits in 2013.

In the light of these headwinds, and continued integration costs related to the Goodrich deal, the 2013 outlook is not that bad. The current 2013 outlook values the firm at 1.1 times sales and 13-14 times annual earnings. Excluding the Sikorsky contract and pension headwinds, earnings could increase to $6.50 per share. Synergies to be achieved as a result of the Goodrich deal could boost that number over $7 per share in the year thereafter.

Shares of United Technologies are fairly valued and do offer long term potential. Shareholders receive a fair 2.7% dividend yield in the meantime. Don't expect spectacular short term returns as investors await the integration progress, and the heavy debt load leaves little room for share repurchases or dividend hikes.

Source: United Technologies - 2013 Outlook Highlights Long-Term Potential